The Federal Reserve Hikes Interest Rates by 0.75 Percent, the Highest Since 1994, in an Effort to Control Inflation

The Federal Reserve hiked interest rates by 0.75 percent on Wednesday, the most in a single meeting since 1994.

The Fed signaled that further interest rate rises will occur this year, as the Fed relies on increased borrowing costs to reduce the excessive demand that is contributing to higher-than-expected inflation.

“Overall economic activity appears to have picked up after edging down in the first quarter,” said the Federal Open Market Committee in a statement, reiterating its commitment to “ongoing increases.”

The Fed’s decision increases short-term borrowing prices to a target range of 1.50 percent to 1.75 percent.

According to economic estimates issued Wednesday, the median Fed policymaker anticipates interest rates to rise to around 3.4 percent by the end of the year. That would imply another 1.75 percent in cumulative rate rises over the next four policy-setting sessions this year.

The Fed is now signaling a substantially sharper path of rate rises than it did in March (when the median member projected a year-end short-term rate closer to 1.9 percent).

The need to move quicker corresponded with Fed members’ projections that inflation would not fall as quickly as they predicted in March.

The median Fed policymaker now forecasts prices to grow by 5.2 percent (as measured by personal consumption expenditures) between now and 2022, up from 4.3 percent in March.

The central bank also downgraded its forecast for several major economic indicators, anticipating the US economy to grow by only 1.7 percent this year, down from 2.8 percent in March.

Fed officials also forecasted that unemployment will climb this year, with the median member now expecting a 3.7 percent headline unemployment rate by the end of the year (which would be a notch up from the 3.6 percent recorded in May).

Change in plans

The decision to hike interest rates by 0.75 percent was a sharp shift from the central bank’s previously disclosed strategy of hiking interest rates by 0.50 percent.

However, a heated inflation report released on Friday, which showed the highest recorded rate of price rises since 1981, showed no evidence of easing pricing pressures in May. When combined with other economic statistics indicating the lowest level of consumer confidence since the 1970s, the dismal outlook prompted the Fed to consider abandoning its previous strategy.

The decision to hike interest rates by 0.75 percent on Wednesday was not unanimous. Kansas City Fed President Esther George disagreed, stating that she preferred a 0.50 percent move.

The Fed’s economic predictions indicate that officials are confident that a more aggressive rate rise path will reduce inflation. Although central bankers boosted their inflation forecasts for 2022, the median member of the committee forecasts headline price hikes to slow to 2.6 percent next year. According to the predictions, inflation might decrease even further to 2.2 percent in 2024, bringing it far closer to the Fed’s 2 percent target.

The next FOMC meeting is scheduled for the last week of July.

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